ARE investors missing out by ignoring the generous cash flows offered by global gaming stocks, or are they right to be wary of a sector that has perhaps too many battles on the horizon?
In many ways the gambling and gaming industries are victims of their own success. Too much money being generated from operations – plus the negative social connotations from the knock-on effect of gambling – has seen governments taking some tough stances against operators as they seek to ensure their slice of the revenue pie under the guise of moral substance.
Such regulatory intervention or threat has led to depressed valuations for many stocks in the sector. Earlier this year, shares in European operator Bwin.party Digital Entertainment tumbled 20% after it was announced Germany planned to introduce a 16.67% levy on sports betting when it opens up its online market next year.
While profits are currently good there’s enough uncertainty in the sector to discourage many would-be investors.
However, with leading South African value manager Piet Viljoen and his team taking some sizeable punts on the sector – in both its local and international funds – there may be some reason for investors to try to understand the sector.
In the core RE:CM Flexible Equity Fund the largest holding for the group is Sun International [JSE:SUI]
, which makes up around 7.5%, while in the RE:CM Australia fund the firm has taken holdings in Tabcorp Australia (7%) and Aristocrat Leisure (4%). In its first quarter feedback to investors, Viljoen described the two last-mentioned stocks as “cheap and out of favour”.
When it comes to Tabcorp, a gaming and hospitality player in Australia, the firm noted it was entering a phase of capital expansion that had also been hit by attempts to take some of its lucrative gambling licences. Commenting on Aristocrat, RE:CM said: “Not only is the gaming cycle low in its largest markets (the United States and Australia) but casino operators are delaying replacement of electronic gaming machines – Aristocrat’s core product.”
The above highlights exactly why many investors are wary of the industry as a whole. To understand the sector you need to appreciate why gambling and gaming operators can’t simply be lumped together. In a nutshell, the sector can be broken into four main groups:
- Betfair, which is the equivalent of an exchange operator, such as the JSE.
- Bookmakers, such as Ladbrokes, William Hill and Victor Chandler, which offer markets on a number of sporting, political and social events.
- Online casinos that offer games, such as online slots and poker, such as Piggs Peak in Swaziland.
- Land-based casinos, which are typically linked to hotel groups.
In SA, Sun International would fall squarely in the last category and not too many other asset managers share Viljoen’s optimism about Sun International. A look at the table shows, relative to their peers, neither Sun International nor Grand Parade Investments [JSE:GPL]
looks cheap on a traditional earnings multiple.
Nor does Sun International have a strong asset base underpin, such as City Lodge Hotels [JSE:CLH]
. That reflects just how dependent it is on gaming revenue as opposed to its support operations. At R88/share Sun International is also trading significantly higher than its net asset value of R14.43, which was reported in February this year.
In fact, of all SA’s players, probably the most attractive is Phumelela Gaming and Leisure [JSE:PHM]
with its dividend yield of some 7%. However, analysts at Imara SP Reid recently cautioned investors about Phumelela, saying: “This business needs to be seen not only as a horse racing and betting business but also a media house. Without the media aspect of both exporting SA racing to the world and importing foreign racing to SA, this simply wouldn’t be viable.”
Imara SP Reid described the horse-racing industry as a “struggling business” and was wary of a proposed “withholding tax” on winnings. It warned clients, saying: “This business and management have lots going for it, but government tax must be resolved for us to turn away from reasonable negativity.”
One person who does share some enthusiasm for the gaming sector as a whole is Charles Savage, of JSE-listed Purple Capital [JSE:PPE]
, who recently invested in sports betting and online start-up Voltbet.com. Says Savage: “It’s an underdeveloped, misunderstood and relatively poorly serviced sector of the gaming landscape. However, it’s proved in more mature markets that it’s a powerful sector and we’re unlocking the opportunity by investing in technology, marketing and education platforms that lower the cost of distribution but at the same time inform the punter better.”
Savage says SA has achieved great success in gaming from a technology and platform perspective and the country should be harnessing that experience and entering into a debate on how to lead the industry more broadly. On government regulation he says gaming provides the fiscus with a strong source of revenue.
But poor regulatory decisions can and do impact negatively on that revenue and drive punters to alternative sources.
“It’s naïve to think that in today’s electronic world our regulation must be centric to South Africans alone. I’d argue that in fact we should look to creating a regulatory platform that provides our gaming industry with a competitive advantage on a global scale.”
Voltbet.com’s Daniel Kustelski says it’s not just a case of lumping gambling stocks together as a whole but understanding the target audiences those different platforms are aiming at.
“For example, take online casinos. Research shows there’s probably a 50:50 split between genders, with a large percentage of the audience aged around 40. By contrast, the online sports betting market is younger and is probably 90% male and 10% female.”
Kustelski adds there’s also a relatively low correlation between the number of people gambling in land-based casinos and those gambling online.
Realistically, can a start-up player such as Voltbet.com actually compete against the likes of Betfair or some of the big international players invading the South African market?
“Betfair is probably one of the world’s most efficient markets. The platform acts as an exchange with deep liquidity, which gives it the ability to deliver the best prices on a huge variety of markets,” Kustelski says.
He says a better way to compare gaming stocks is to see to which markets the bookmaker can deliver the best markets – for example, Super 15 rugby and local soccer – and then start comparing them on some of the more global markets.
He uses the example of the recent Players Championship golf tournament, where Luke Donald started at a 15/1 favourite for the event. That would be attractive to would-be punters, who’d see a great opportunity for risk and reward and therefore attract more money.
“Betting World being bought by Phumelela demonstrates the need for traditional land-based guys to go online as an example to expand product offering and gain a piece of the online sports betting market,” says Kustelski.
Finweek’s view? Viljoen has a cracking track record of sniffing value in out of favour markets. But investors need to weigh the opportunity cost of tying up capital while hoping for a turnaround in the gaming sector. It should also never be forgotten the bigger the honey pot appears, the more likely it is to attract attention from those seeking their spoonful.
* This article was first published in Finweek.
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